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How The $1.4 Trillion In Bank "Phantom Income" Is Really An $84 Billion (0.5% Of GDP) Consumer "Phantom Stimulus"
A few days ago Robert Lenzner of Forbes had a column discussing what he termed "phantom income" created by $1.4 trillion of delinquent mortgages, based on an analysis from TrimTabs' Madeline Schnapp. As usual, we decided to bypass the messenger and go straight to the source. Below is Madeline's clarification on the issue. As we expected, it is not so much an issue of bank mortgage fraud and cash flow deficiency (which by now everyone knows is pervasive, and everyone knows is being backstopped each and every quarter by the GSEs to the tune of tens of billions of dollars every three months like clockwork). Incidentally, a topic we are surprised nobody in the media has picked up on, is that indeed banker bonuses appear to be running well below last year's levels for many institutions. The reason: while accounting gimmickry allows banks to pad their bottom line, it does little to actually stimulate the cash flow statement. And since investment bankers prefer to be paid with cash and not out of accounts payable, the truth is that banks are actually hurting when it comes to actual cash retention: a big red flag to cut through all the FASB accounting fraud. But back to Schnapp's point: a far more important observation, and one which we have been claiming since 2009 is the primary reason for the consumer "renaissance", is that the "phantom stimulus" which allows consumers not to pay their mortgages (with the banks' and the GSEs' blessing) is equivalents to about $84 billion annually, or 0.5% of GDP. Add to that the $120 billion in payroll tax cuts and $60 billion in "Make Work Pay" tax credit, and one can easily see how that government's fiscal largess immediately accounts for more than half of the projected 2011 GDP growth, the other half being more than accounted for through (now years of) inventory restocking.
We asked Madeline to elaborate on her $1.4 trillion number. Here is what she said:
It was a number taken out of context.
Here is the context using back of the envelope calculations.
There are currently about 7 million delinquent mortgages in which homeowners are not making payments.
Average mortgage probably $200,000
That means there is somewhere in the neighborhood of $1.0 to $1.4 trillion in non-performing loans that exist somewhere in the system which need to be wrung out of the system if we are ever to get the housing market back as a healthy sector of the economy.
Phantom Stimulus coming from non-performing loans?
Since the average time to foreclose is 484 days and homeowners aren't making mortgage payments and instead are now pocketing their payments, there is a transfer going on from the mortgage servicers who would ordinarily be the recipients of the payments, to the pockets of consumers.
If we assume a mortgage payment is $1,000 per month or $12,000 per year, then conceivably you could be looking at $84 billion annually in extra income to consumers to spend or save.
To put that amount in context, it is greater than the $60 billion "Make Work Pay" tax credit, and is about 2/3rds of the $120 billion extra money that is supposed to come from the 2% payroll tax cut. Or in GDP terms, its in the neighborhood of 0.5% of GDP which is a lot considering Q3 GDP was only 2.7%.
In our view, that's an interesting way of stimulating an economy.
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UFB. Thanks to holligan2009 and TheProphet for linking this on the Eire money printing thread. Interesting clarification from Madeline Schnapp. Regardless of the "phantom income" concept, there's still $1T of bad mortgages per her analysis. Didn't hear about any of this on the JPM release on Friday. Maybe our ZH friend with the FAZ lawsuit will find this interesting?
ETA: It's William Pitts. Here's the ZH story about the lawsuit:
http://www.zerohedge.com/article/reader-threatens-sue-fed-after-losses-i...
Uh folks don't forget about the commercial loan fraud of which IndyMac was huge in
and then there deadbeat borrowers went after softer targets like small, crooked
banks. I'll bet a fair % of com/loans are BS. Here is but one good story.-short
http://www.youtube.com/watch?v=QeiWUCSry8o&feature=related
All you need to know:
http://www.youtube.com/watch?v=lmBFYaYgmS0
Too late to save now unfortunately. Save yourself and your loved ones.
Read and weep for the Republic:
http://blog.littlesis.org/2011/01/10/evidence-of-an-american-plutocracy-the-larry-summers-story/
Thats why peaceful revolution isn't possible Ned...
this could be the end but until it's over i still have a home and where i come from there are thousands more like me spitting in the eye of the plutocracy storm.
Some random thoughts on todays biggest issues:
I'd just come out of the store with a pie, large chips, and a large
sausage sandwich. A homeless man was sitting there and said 'I haven't eaten for two days. I told him 'I wish I had your fucking will power'
Top tip; if you're camping in the summer and the attractive girl in the
next tent tells you that because it's so hot she will be sleeping with
her flaps open, it's not necessarily an invitation to casual
sex........... Wish me luck; I appear in court next Monday.
I got fired on my first day as a male masseuse today.. Apparently the
instruction 'finish off on her face' didn't mean what I thought it did.
A fat girl served me food in McDonald's at lunch time. She said 'sorry
about the wait.' I said 'don't worry Chubby, you're bound to lose it
eventually.'
Snow in the forecast! The TV weather gal said she was expecting 8 inches
tonight, I thought to myself "fat chance with a face like that!"
I have a new pick up line that works every time. It doesn't matter how
gorgeous or out of my league a woman might be, this line is a winner & I
always end up in bed with them. Here's how it goes 'Excuse me love,
could I ask your opinion? Does this damp cloth smell like chloroform to
you?'
Years ago it was suggested that an apple a day kept the doctor away. But
since almost all the doctors are now Muslim, I've found that a bacon
sandwich works best!
I took my Biology exam last Friday. I was asked to name two things
commonly found in cells. Apparently "Blacks" and "Mexicans" were not the
correct answers.
you are a very bad man...got any more? heh
HAHAHAHA!! YOU MADE MY DAY :)
I don't know why more people don't stop paying on their mortgages. Especially in places like NYC where the average default-to-foreclosure period is more like three and a half years.
I guess the propaganda machine has done its job pretty well. Most people I talk to are convinced that their interests are best served by government intervention to prop up home prices, even if they have negative equity. Very few people realize that it's the banks who benefit when their underwater clients are deluded into believing that it's worthwhile to keep paying on their mortgages. It doesn't occur to most people that if more people walked away to buy cheaper another day, and by doing so drove home prices down further, the homeowners would gain and only the banks would really suffer.
Even a lot of non-homeowners who know it's better for them personally if homes are cheaper think it's somehow better for the economy if home prices are inflated. The propaganda machine has done its job very well indeed.
I guess humans are just damn gullible, what can you do.
New York is not a non-recourse state. If you have the money and simply don't pay, you will end up owing it anyway. Eventually, if you get to the point of needing to declare personal bankruptcy, then this is a much more viable option, but otherwise, deciding to do this simply because you don't want to pay can be a financially dangerous thing to do. It goes on your credit record immediately, and a foreclosure can stay on it for a long time. If you want to change jobs, you can expect your prospective employer to run a background check on you. That will include a credit check. As an employer, I would have a hard time employing someone who has strategically defaulted - why would I trust someone who does not live up to their obligations simply because it is financially convenient not to rather than someone who does?
Your point about home prices...
I am not sure how you can say that non-homeowners should consider falling home prices to be a "gain" for homeowners. It may be good for non-homeowners who are waiting for home prices to fall so they can buy at lower prices, but it is certainly NOT a gain for the majority of homeowners.
In the end, having banks be gutted may make you feel good but it will not make your next mortgage cheaper. If banks see that homeowners are more structurally more likely to walk away from their house, and also more likely to vindictively damage it (pouring concrete down the toilet, ripping out copper and fixtures, etc), mortgages will become more expensive.
Mortage bond investors will cause that to happen because they will want more buffer. The non-agency mortgage provision business has gotten really small because mortgage investors don't want to take the risk of homeowners.
Big banks are, in the end, just intermediaries between actual borrowers and actual risk-takers. Making them suffer will not improve the lots and lives
of existing or future borrowers except in a 'beggar-thy-neighbor' kind of way.
Big banks are an intermediary between risk takers and borrowers???? What fucking world are you living in? What a fucking dolt you are.
You don't have one fucking clue how fractional reserve banking works, do you?
I live in this world - the one with existing banks and financial systems operating under a fractional reserve system. Not in a Rothbardian-Libertarian full-reserve (or heaven forbid, "free reserve banking" system (proof if one needed it that Rothbard and friends have no practical concept of banking and monetary systems)) dreamt up by otherwise well-spoken ZH commentator hacks.
I have every understanding how fractional reserve banking works. Any point you have about fractional reserve banking having ANY impact on an answer here is when you assume banks' only business is that of taking deposits and lending it to other people. This is not how banks work these days (in this world) except in the simplest of cases - S&Ls where the president's name has been the same for three generations.
The total balance sheet of the five largest banks is but a small part of the total balance sheet of all private sector financial assets, and in the end, most of the B/Ss of the majors are funded by other private sector financial assets (the nature of leverage).
I also understand, with the greatest intimacy, how large global banks run their equity capital and balance sheet. The vast portion of the "risk" in banks is the 'mismatch' between institutional funding and institutional lending (personally, I think institutional funding of megabanks which have significant capital risks AND significant derivatives books (even if risk-matched) is a very bad risk, but that's not my problem), which in a not-TBTF world is effectively pass-through (to institutional funding providers), and in a distressed but TBTF world is effectively pass-through (high funding costs reflect the 'worry' that TBTF might be allowed to fail, and raise costs to institutional borrowers - who effectively monetize their own risk).
Private-label MBS, CMBS, CDOs, ABCP, other VIEs are all pass-through to a great extent (usually 85+%). Asset swaps, other high-delta swaps, high-delta debt/warrant issues, etc, are all pass-through to an even greater extent. Most of the rest of the balance sheet of a global investment bank (which are part of many, if not all, major global banks) is the provision of access or leverage with collateral, and/or market-making inventory. There is some purely proprietary risk, but as a percentage of the whole balance sheet, and of RWAs, it is relatively small. A large portion of the non-commission business is market-making of some sort, with liquidity risk taken paid for by spreads. So yes, the vast majority is pass-through.
Speaking of phantoms, I also read somewhere that banks are accruing phantom interest income on non-performing mortgages right up until the time the property is finally transacted. Then the accrued amounts are purged from their revenue accounts. That's one more reason to be suspicious of zombie earnings numbers.
This was my understanding as well. The bank can continue with the phantom revenue right up until the foreclosed home is actually sold. If so, the shadow inventory of REO properties are all helping prop up the books.
But, as the article suggests, this is causing some big cash flow issues, which I am sure is connected with POMOs....
In San Jose, there are more homes foreclosed in 2010 than those in 2009. I don't think major lenders here BankofAmer, WellsFar and WashingtonMut have been honest about their quarterly reports. It gonna be a lot of lawsuits in coming year, I'm sure.
50% of California households with a mortgage cannot afford the home they are living in. And nearly one-in-three CA mortgagees are underwater.
www.doctorhousingbubble.com
I am a big fan of the "Doctor" and his facts and figures analysis...
And it will continue; if the homeowner isn't going to get principle reductions they will get reductions via free rent.
The government could have mandated principle reductions then everyone, including the banks, would receive a "bailout". They think the massed are stupid and we are not. Housing prices will reset to their far value or lower on way or another.
At times like this, I feel I am in an alternate universe.
People, Economists especially are IDIOTS.
Riddle an old fool this.
How do you get an increase in GDP, by people not paying their mortgages?, the only reason they are still there is they DO not have the funds to pay the mortgage, and the lien hiolders are letting them slide.
How does one ASSUME that they have the funds to pay,just do not feel like it, and are spending it on iPods,flatscreens, and new Mercedes?,thereby contributing to the economy.
We have totally lost it.
Don't see your problem with economists. Nothing you wrote about has to do with economists. Bankers? yes, Accountants? yes, but economists deal with statistics that are GIVEN to them.
Can they be complicit? Sure. However, criminal behavior is not a representative of a school of thought.
"Phantom stimulus"? Well, if the stimulus, unlike the income, is real but hidden, wouldn't it be better to call it "shadow stimulus"? Sounds sexier too. :)
thanks cursive and TD for clearing that up with the source..I overreacted when I saw the reference to the way that the banks are carrying the interest on NPL (delinquent/foreclosed) as income UNTIL the loan forecloses. My bad. Still if they do, then 484 days average to foreclose and recognise interest not earned and a loss on the loan..takes us back 16 months to September 2009. In fairness to Forbes, they did do a Part 1 and Part 2 thing to clarify. I will stick to zero hedge heh
ponders if i can tell my bank that my income is higher, because my kitchen cupboard is paying income...and hide it from the tax man and get the bank to lend me loads of money at zero rates
this could be the end but until it's over i still have a home and where i come from there are thousands more like me spitting in the eye of the plutocracy storm.
i cashed out my property in dec 2006...no really i did, the interest was paying my rent until it went to zero, now i dont have the guts to go back in yet...trouble with gold is everyone knows you have it...you buy ten kilo bars and you gonna get stalked..so in the bank it is! they keep asking me to take a high interest account..from 0.25% i can get...0.5% per annum..hell with headline CPI where it is I want that a month!
$10+ mil in liquid, hm?
It may be an incorrect assumption that they are pocketing their payments.
They may be 99'ers and unable to make the payment. Therefore there is substantially less stimulus here to main street.
Considering that the delinquent mortgages are being dumped on Fannie Mae and Freddie Mac -- and then onto the taxpayer -- that means we own them. So we (the taxpayers) might as well just accept it, hire real estate managment companies, and rent out the properties. If they don't pay, kick them out and let them sleep under bridges or something. Otherwise they pay rent -- to us. We might as well salvage something out of this mess.
The Point of The Original Story was that the banks have huge losses looming, and they were not taking them. There was no clarification in this regard.
This is bullish....sarc off.
"bullish", by removing /sarc/, rearranging, and adding a dropped t translates to "bullshit"
if more (ALL) homeowners stopped paying their mortgages, THEY would benefit from the collapse of the prices of homes and property taxes ......SIMPLE !
Fact is: Every week at least 1 puzzle piece is found and thrown in some parts of the media (ZH included)
Every puzzle has at least 4 sides
If we're lucky we find another piece that fits another piece
and all the pieces we have are only part of the sides of the whole picture and nobody has any idea how the picture really looks like.
And the picture is getting bigger and changing every year.
by the way, bankers bonuses are down in aggregate, but up per capita banker and to get round the bonus scandal, salaries globally were ratchted up to compensate for lower bonuses....just saying..
oh wait,,,banks don;t have to disclose anything if they are vital to the national security interests
http://www.zerohedge.com/forum/name-national-securitypublicly-traded-companies-excused-usual-accounting-and-securities-disclo
hmmmm
Saying that people should simply refuse to pay their mortgage is stupid. For those who cannot pay at all, there may be no other way out than personal bankruptcy. If one can pay, and one has other assets, strategically default will not win you any points. It stays on your record, and you can be chased down for the amount you owe.
The decision to NOT pay your mortgage when you have the means to do so otherwise should not be taken lightly.
Not all states are non-recourse states. The list of non-recourse states is: Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, Washington. Note, however, that ONLY applies to the first lien. If there is a HELOC (home equity line of credit), or second mortgage, that is a recourse mortgage.